The U.K.’s Guardian tells us, “Yet another study – this one from no less an authority than the non-partisan US Government Accountability Office (GAO) – is here to remind us that we’re woefully unprepared, financially speaking, for retirement…. [T]he truth is that as many as half of all households with Americans 55 and older have no retirement savings at all. Nothing. Zip. Nada. Not a dime.”
The Guardian is describing a GAO study entitled “Most Households Approaching Retirement Have Low Savings” – so you can’t say the Guardian missed the message the GAO was trying to convey.
But is it true?
The answer is no, at least not in any rational sense. The GAO measures one source of retirement income, which is retirement accounts like 401(k)s and IRAs.
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And by that definition the GAO is correct. If you look in the Federal Reserve’s Survey of Consumer Finance for 2013, 53% of households aged 55 to 64 had savings in retirement accounts. So yes, almost half have nothing -- in retirement accounts, that is. But that’s about all I can say for the number.
Why? Well for one thing, the percentage of near-retirees with retirement account savings is at near-record levels. The 53% figure for 2013 is statistically indistinguishable from the record figure of 54% in 2004. More importantly, retirement account ownership in 2013 was more than double the 22% rate in 1989. If holding a retirement account is your measure of retirement income adequacy – and in this article, it is – then Americans nearing retirement today are a lot better off than ever before.
But there’s a great deal more to the question than this. Because, even today, retirement accounts aren’t the only form of retirement saving. Many Americans still have traditional defined benefit pensions. Twenty-two million Americans work for the federal, state or local governments, making up 14% of the labor force. Almost all of them have traditional pensions, while few have retirement accounts. So part of the population of Americans that the GAO claims “have low savings” in fact have accrued pensions worth hundreds of thousands or even one million dollars.
Traditional pension coverage has shrunk considerably in the private sector, as federal rules passed in the 1970s forced employers to reduce onerous vesting requirements and to more fully fund the benefits they have promised. Still, around 13% of private sector workers currently participate in a DB pension. And many more participated in a DB plan in the past and will be paid benefits from it once they retire. Overall, the SCF data show that about 40% of all workers aged 55-64 in 2013 expect to receive a traditional pension benefit in retirement.
Since some workers have both traditional pensions and retirement accounts, you can’t add DB and retirement plan coverage together. But from the SCF, 73% of near-retirees in 2013 had either a retirement account or a traditional pension. So the more accurate statistic isn’t “nearly half” have no retirement savings, it’s nearly three-quarters do have savings.
So what else are we forgetting? Social Security! The vast majority of retiree households receive Social Security benefits, and the average household can expect to receive more than $265,000 in Social Security benefits over the course of their retirement. In other words, nearly everyone approaching retirement has some form of retirement savings, based on the 12% of their earnings they paid into Social Security throughout their working careers.
What writers on retirement saving need to realize is that, for low-income Americans, Social Security may be enough. Counting those Americans among those who aren’t saving enough for retirement may not make sense. Now, will Social Security be enough to have a comfortable retirement? No, very few people will live comfortably on what Social Security will pay them. But that’s not the standard for whether a person has saved sufficiently. The standard – as built on the “life cycle model” in economics – is whether a person’s retirement income will enable them to maintain their pre-retirement standard of living.
Let’s say that you’re someone whom the SSA deems as having “very low” earnings over your lifetime, meaning around $10,000 per year even late in your career. About 19% of Americans fit that description, according to the SSA. For a very low-earning worker retiring at the full retirement age of 66 in 2015, Social Security provides a benefit that’s equal to 84% of their average earnings from ages 45 to 60. Should we raise Social Security benefits for these workers? I think so. But given the Social Security benefits we do pay, should these workers make themselves worse off during their working years in order to increase their retirement replacement rate further? I’m not at all sure about that.
Alternately, let’s use the SCF and look at near-retiree households with annual household earnings above $15,000. Here I’m thinking of an average household size of 1.5 people earning at least $10,000 each per year. In this group, 85% have either a retirement account or some entitlement to traditional pension benefits, on top of Social Security.
Now, do they have enough set aside for retirement? That’s a very different question and different studies come to different answers. Some popular studies claim that for most Americans the answer is “no” and that the total “retirement savings gap” may approach $14 trillion. Other studies – principally those conducted by academic economists – find that roughly three quarters of households are saving enough for retirement and that total saving shortfalls, by my estimate, are $1 trillion or less. That sounds like a lot, but total private pension assets, household retirement savings and accrued Social Security benefits are worth somewhere north of $60 trillion.
Retirement planning is, by newspaper standards at least, a sexy topic. Everyone has to think about it and everyone worries about it. There are big, headline-producing statistics that spur web hits and shares on Facebook and Twitter. The reality is that planning for retirement is pretty complicated, with how much you need to save depending upon your earnings, your family size and other factors, and your expectations of how all these factors may change going into the future. One finding from academic research is that seemingly similar households actually may have very different levels of optimal retirement savings.
So reporters, and readers, shouldn’t let themselves get sucked in by seemingly simple statistics that may not come close to telling the full story. Most Americans nearing retirement who should be saving are saving. The only question is whether they’re saving enough.
